Why Digital’s Next Steps Can’t Be Baby Steps

I want to spend the next few minutes building the case that digital music is in a period of transition, a stage that presents us with a unique and ever narrowing window of opportunity to drive truly transformational change within the music industry. The fact that this panel focuses on both retailing and licensing is emblematic of the convergence, nay collision, of product models and business models. Collisions that help explain the current turmoil the music industry faces and in which the foundations for future growth lie.

So what exactly has gone wrong?

Firstly, digital retailing is looking increasingly unfit for purpose. It has failed in its key objectives, included in which is a failure to generate a format succession cycle. With the cases of the cassette and the CD, these formats were firmly in the ascendency by the time their predecessors were in terminal decline, and they then went on to drive periods of unprecedented prosperity. The same though patently does not apply to the paid download. However if you swapped out paid downloads for MP3s then the line would be off the chart. Consumer demand is not the problem. Current digital retailing formats failing to meet consumer demand is. And of course Apple’s closed iTunes ecosystem plays a massive role here too.

And if you look at the licensing side of the equation we have problems there too. Rights owners and artists both feel they don’t get enough from Freemium cloud services, and yet the services themselves feel that they pay too much to those very same parties to be financially sustainable. With cracks appearing right across the value chain it is looking increasingly like there are too few levers left to pull to fix the model.

Now as concerning as all this may be it doesn’t mean the end of the music industry, nothing like that in fact. Instead it is simply the end of the beginning: the end of the first chapter in the digital music business.

What we have now are transition products that did a great job of starting us on the path out of the analogue era but their usefulness is drawing to a close. The paid download is a sustaining innovation. For those of you not familiar with Clayton Christensen’s ‘Innovator’s Dilemma’ this refers to the principle that companies essentially have two ways to innovate their products. The first is that they can play the safe game where they tweak features and pricing to defend market share and revenue growth. These are sustaining innovations. Or they can take a gamble with disruptive innovations that have huge potential but also massive risk and can even shatter their existing business models.

Unsurprisingly most incumbent companies opt for the safe bet. But the safe bet is often anything but safe, as it leaves an innovation vacuum which is swiftly filled by the competition, or in the case of music, by the illegal sector. File sharing was the disruptive and transformational innovation of digital music, not the paid download. Added to this, innovation has been too heavily focused on business models and not enough on user experience. Now the music industry needs to create its own transformational innovation, putting user experience to the fore, before the informal sector does so….again.

So how do we get out of this situation?

Here’s my uber edited solution: two segments and three monetization models. Forget for a moment the complex multi variant segmentation schemes you’ve painstakingly constructed. Think instead of consumers as those who will pay and those who won’t. On the free side we have those consumers who are falling out of the habit of buying CDs and either haven’t discovered digital alternatives yet, or if they have they are perfectly happy with free services such as Pandora, Spotify, We7 and of course their killer app: YouTube. Here also are all those pesky freeloading pirates – they’re not lost customers, but they’re probably not about to start paying 9.99 a month for Spotify Premium either. And on the other side we have the highly engaged music aficionados. This used to just be the ‘50 quid bloke‘ but sites like Pledge Music are creating a new generation of younger music fans who will pay good money for recorded music when they establish a direct relationship with artists.

The way to monetize these three groups is threefold: at the bottom of the hierarchy are ad supported free services for the passive majority and the freeloaders, where the contagion of free is legion; at the top there are premium services for the much smaller numbers of engaged aficionados (but they need an entire new generation of music products that are interactive, social and connected, a true successor to the CD – if all they have to chose from is 9.99 a month streaming rentals then this segment will dwindle to the few percentage points of consumers who actually pay those services); and in the middle we have the best balance of scale and ARPU, with subsidized services where third parties such as telcos and car manufacturers pick up some or all of the wholesale cost to make music feel-like-free or close-to-free for end users. This is the monetization model which will pull in many of those who won’t pay and also those who are in danger of falling out of the habit of paying.

So there you have it: 2 segments + 3 monetization models = the foundation for a prosperous music industry in 2012 and beyond.

3 thoughts on “Why Digital’s Next Steps Can’t Be Baby Steps”

What’s not a pyramid in the world? do you really think in their negotiations they are truly concerned about Independent Artist and their very small portion of this billion dollar pie? Of course not, C’mon.
Yes we need better laws that can restrict this Piracy downloading., Yes we need artist to not sell an entire cd for .99cents, Yes we need, okay you get my point, It’s all about equality even in the cut throat record business.
One main point I haven’t seen in any article is that the musicians who create that which being fussed over, MUSIC, are not really being thrown into the fray with to much genuine concern. Aren’t we the ones who are creating the music past, present and future? what if there was no music? see the article: “Life without music” at:http://www.thesilverconductor.com
Who am I? The Silver conductorhttp://hubpages.com/hub/The-Silver-Conductor
it’s a digital industry baby!
Remember” Always know who loves you”
The Silver Conductor

It makes perfect sense to me. I find the top chart most interesting – it definitely appears that something is wrong. However, it is good to see that you have identified the free streaming masses who use ad funded products to be an important revenue stream as I do as well!